Crisis and Recovery

With the exception of Bahrain, where anti-government protests were violently suppressed by the ruling royal family with military support from Saudi Arabia, the kingdoms and sheikhdoms of the Arabian Gulf – in America we refer to it as the Persian Gulf, but that terminology does not sit well with the Arabs – have appeared largely immune from the struggles of the Arab Spring. There have been no street demonstrations, no tear gas, no bullets, rubber or live.

I have just returned from a three-week stay in the Middle East. A few days in Doha, the Qatari capital, to attend the World Petroleum Congress and then the rest of the time in Kuwait, where I am part of a team doing a feasibility study for a technology park. It was my first-ever visit to Qatar and my first to Kuwait since 1986. Doha, flush with money from natural gas, a small low-slung, dun-colored city 20 years ago, now resembles a sci-fi movie set, all futuristic towers glowing with neon, surrounded by the most barren of landscapes. Kuwait City has expanded enormously, and sprawls almost from the Saudi border in the South to the Iraqi frontier in the north. Areas that were empty desert 25 years ago are now studded with new suburbs filled with enormous mansions and shopping malls. Young Kuwaitis zoom around town in Hummers, Range Rovers, and Maseratis or on Japanese super-bikes, stopping to eat at any of a mind-boggling array of Western restaurant chains. Applebee’s, Chili’s, Taco Bell, Burger King, McDonald’s, Pizza Hut, TGI Friday’s, they are all there. The 1991 Iraqi invasion seems impossibly distant. [click to continue…]

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Marco Rubio, the Tea Party-leaning freshman Senator from Florida, recently said something remarkably intelligent, if self-evident, which appears to elude most Washington policy makers. “We don’t need more taxes,” he said, “We need more taxpayers.”

This is axiomatic for anyone trying to reform tax systems and increase government revenue, which I have done in a number of countries in Africa and Asia. In most of these countries, as well as in places like Greece and Italy, most people (and companies) do not pay taxes, at least not officially. Tax administrations are both inefficient and corrupt; if you’re lucky you will never attract the attention of the taxman, and if you’re not, a bribe – possibly significant, but almost certainly less than your true tax liability – will do the trick. And when garbage piles up in the streets and public money vanishes into the pockets of corrupt politicians and bureaucrats, it is natural for citizens to decide government is not worth whatever taxes they are supposed to pay.  In most of these countries, it is foreign individuals and corporations, who lack the proper connections, who are not steeped in the arcane rules of the game, and who try to obey the law, who shoulder much of the tax burden. The cell phone company, the brewery, and the oil and mining companies – and their foreign employees – are easy and highly visible targets, and governments never tire of trying to change the rules, imposing new taxes or demanding a share of the company.

The United States, of course, is not Nigeria or Greece. As hard as it may be to follow the letter of the law when the tax code runs to 10,000 pages, most people and companies try their best, exploiting whatever advantages they and their accountants can find, but rarely committing any deliberate infractions, cash payments to the guys who help carry your furniture up to the second floor apartment notwithstanding. The IRS is too effective, and the penalties too great, for most of us to chance it. And, at least until now, most Americans have thought that paying taxes is one’s duty as a citizen. [click to continue…]

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Even as unemployment in the United States stubbornly remains above nine percent, many companies struggle to find qualified workers. In its 2011 Talent Shortage Survey, Manpower, Inc., the staffing agency, reports that 52% of U.S. companies are having trouble recruiting essential employees, up from 14% in 2010. On the one hand, this could be a sign of a real recovery – economic growth and renewed confidence creating a surge in employer demand – but on the other hand, it could be a sign that the United States is losing its competitive edge, failing to produce graduates and school leavers who possess the attributes employers need: chiefly, literacy, numeracy, and a work ethic.  The United States is hardly the only country to face such problems. Saudi Arabia, which differs from the United States in just about every way that matters, is trying to resolve its twin problems of unemployment and a lack of skills in ways that could be instructive for U.S. policy makers. [click to continue…]

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Economics is not quantum physics. The mathematics may be abstruse in either case, featuring equations which, having run out of Greek letters, resort to smiley faces and other symbols to designate variables. But whereas quantum physics is so hard that even its practitioners don’t entirely grasp it – Nobel Prize-winning physicist Richard Feynman said, “I think I can safely say that nobody understands quantum mechanics”there is nothing terribly difficult about the concepts underlying economics, even if there is spirited disagreement over some of them.

This is why the profound idiocy infecting American fiscal and economic policies is so disheartening. Either our elected and appointed officials and candidates for high office are completely ignorant of the most basic economic principles or they are lying in an effort to win political favor. I’m not sure which explanation is more frightening. Former Minnesota Governor Tim Pawlenty, considered one of the more moderate and “grown up” candidates for the 2012 Republican Presidential nomination, last week came out with his economic plan, which Financial Times columnist Clive Crook called “an idiotic farrago…stunning in its vapidity.”    If anything, Crook is too kind. [click to continue…]

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Even in the midst of an ongoing Euro-zone crisis with no obvious solution in view, investors have no trouble distinguishing between one European country and another, as the yield spread between German and Greek government debt (currently 860 basis points, or 8.6 percentage points) clearly demonstrates. Why, then, are investors so amazingly dense by comparison when it comes to emerging markets? Why do they – willfully, it seems – refuse to recognize that there are huge differences between, say, Chile and Venezuela, which lumping them together into an emerging markets basket or a Latin America basket can only obscure?

Ten days ago, while the Egyptian democracy movement was still gathering steam and uncertainty abounded as to the political fate not only of Egypt but of the entire Arab world, the Financial Times reported that investors had pulled more than $7 billion out of emerging markets equity funds during the preceding week. This was the biggest withdrawal in over three years, which the FT attributed to “turmoil in the Middle East and rising food inflation [which] raised fears of economic instability.” Egypt, it said, may have been the catalyst, “but the fund outflows also reflected deeper unease about economic overheating in China, India, Brazil, and other big emerging economies.” The article went on to quote several fund managers who said that developed markets now represent greater value than emerging ones and as proof pointed out that nearly all of the $7bn lost to emerging markets had been reinvested into funds focused on the United States, Europe, and Japan. Though the magnitude of emerging market outflows and developed market inflows during the week of January 31 was the biggest so far, it was the fifth consecutive week in which investors had fled emerging markets for the relative safety of the big developed markets. Apart from political turmoil, investors apparently were spooked by rising inflation in emerging markets. The proof? Indonesia, Brazil, India, and South Korea have all raised interest rates this year. [click to continue…]

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